Wednesday, November 11, 2009

Commodity prices and gold prices continue to rise. This chart makes two important points: 1) in real terms, commodities are still quite cheap from an historical perspective, and 2) monetary policy plays a very important role in commodity prices. I've broken the past 40 years down into three separate monetary regimes: first, the easy money policies of the 1970s, followed by the tight monetary policy of Volcker and then Greenspan, and lastly, the easy money policies of Greenspan and then Bernanke. One might argue with my classifications, but in a gross sense I think they make sense. Tight money is bad for commodity prices, while easy money is good. It would appear that commodity prices today have plenty of upside potential.